No one likes a blot on their credit. A negative item on a credit file, depending on what it is can kill a mortgage loan file. One would like to assume that credit issues are discovered in the process leading up to pre-approval but that isn't always the case. Credit is a moving target and the consumer's credit activity is constantly changing the picture.
One of the forms in my loan package even addresses this issue. If a consumer applies for new credit in the process of a loan application the lender will find out about it. Depending on what that inquiry entails - - particularly if it results in more debt, the borrower can find him or herself without a loan. The payment for the new credit account will have to be integrated into the debt ratio. For people that are close to the debt limit, a little more may be too much.
Added credit inquires can also reduce scores - - not what you want to do while a mortgage loan is in progress.
A new collection or a late payment can send a credit score spiraling downward - - which in turn can end with the borrower no longer qualifying for a mortgage.
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I think we could all use some. So here it is: The Consumer Financial Protection Bureau has been doing an investigation on credit reporting practices and has come up with some new rules for reporting credit.
Under current rules a collection remains on a credit report whether it is paid or unpaid for seven years. According to the Wall Street Journal 106.5 million Americans have a collections reporting on their credit reports. 64.3 million of these were due to medical collections.
Most of the people I know have had it happen. There is a medical procedure. The bill comes from the hospital which states "pending insurance" and that is the last you hear of it until you are contacted by the collection company. What happens is that medical billing companies in their haste to collect, wait 30 days. Insurance claims can take more than 30 days to process. If the payment isn't made within 30 days the bills go to collections. It can be thousands of dollars in bills-or the portions of bills that the insurance doesn't pay and the information is never updated. The paid ones still report open, and there is never another bill generated for the consumer for the unpaid portion. All of this can whack your credit score.
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And it drops like a stone - -even if you pay all your other consumer debt on time. But under the new rules, once a collection is paid it must be removed from the credit report and medical collections will not count as much against total credit as other types of collections. The change to these rules may make as much as a 25 point difference to the better in credit scoring. 25 points is huge. It can make the difference in being about to be approved for a loan and improve the interest rate.
Unfortunately this change won't occur overnight. I have read two reports one saying changes are due to occur in 6-8 months the other 12-18 months. Whichever it is, it is about time.
I have run into several people lately who don't like credit cards and I don't blame them. However, it is important to realize that revolving credit has the biggest effect of any item on credit for good or bad. So if you only have one or two credit lines on your credit report, if one of them is paid late even once, there is a disproportionate effect on your credit score. The reason is essentially the law of averages. There just isn't that much on the credit report to average out the damage of the late payment. A healthy report with two credit cards, a car loan, and maybe a student loan or an installment loan of some type and being paid on time, with credit balances maintained at 50% or lower on the credit cards should reflect a good credit score.
Meanwhile I encourage everyone to pay rent, utility companies, and consumer credit on time. As a bit of added information, while I would advise you to speak with your creditors if you know you are in a situation in which you will be behind in your payments. But, even though you make alternate arrangements, the creditor will still report you late.
So be of good cheer, there is a bandaid coming for what ails your credit report.
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